The Cost of Goods Available for Sale (COGAS) formula tells you how much inventory you have available to sell right now so that you can see what you need for the future. By calculating it, you can avoid overstocking or running out of products when demand is high. You can even use the COGAS formula to calculate what is needed if big opportunities arise.
Here’s the COGAS formula:
COGAS = Beginning Inventory + Current Period Costs of Inventory
COGAS is closely related to cost of goods sold Also, while COGS is mainly for financial reporting and historical analysis, the COGAS formula helps you operate your business now and plan for the future.
How to Use the COGAS Formula to Manage Inventory Levels
Using the COGAS formula can help you ensure that upcoming orders won’t go unfulfilled and that money isn’t wasted by sitting on too much inventory.
For example, imagine your beginning inventory is $100,000 and you have purchased $50,000 so far this quarter. You also have a sales forecast of $1,000,000.
- COGAS = $100,000 + $50,000 = $150,000
With a sales forecast of $1,000,000 and your COGAS, the inventory value needed to meet your sales objective should be about 25%, or $250,000. That means COGAS is $100,000 less than you’ll need.
Using COGAS, a good business decision here would be to tell the purchasing manager to stock up on inventory in order to meet customer demand.
The COGAS formula also helps avoid tying up too much of your money in inventory. Let’s say that next quarter’s sales forecast shows $1,200,000 and your COGS forecast is $300,000. Suppose you ended the last quarter with $50,000 in inventory and purchased another $700,000. Your COGAS formula would be:
- COGAS = $50,000 + $700,000 = $750,000
That’s 2.5 times the amount you need ($750,000 COGAS vs. $300,000 forecasted). Instead of overstocking, you could’ve invested in advertising for new customers, implemented new systems to increase production efficiency, or you could have put the cash in treasuries to earn some interest income.
In the situation above, you’d want to invest in moving products vs. creating more. By regularly calculating your COGAS throughout the quarter (and the year), you can easily correct your course and redistribute funds to help ensure inventory is always moving.
Using COGAS to Avoid Missing Major Opportunities
Using the COGAS formula on a regular basis helps you to understand your current situation and make the best business decision at any given point, including when major opportunities arise. Here are two common examples to consider:
- One of your sales representatives gets a big new account, and they’re ready to place a large initial order.
- An existing client’s business takes off and they place a big but unexpected order.
Working with the first example, you now have a national account worth $8,000,000 annually. The catch is that you need to countersign the contract by the end of the day in order to prevent a competitor from undercutting you.
If your COGS runs at 25%, you need $2,000,000 of inventory per year ($500K per quarter). The question is, can you commit to this and sign by the end of the day? That’s where keeping up with your COGAS on a regular basis helps.
- Last quarter ended with $100,000 and you’ve purchased $300,000 this quarter, so COGAS is $400,000.
That’s not enough to fulfill the new account, much less have any inventory available for existing customers. But because you tracked your COGAS closely, you can take immediate action.
Instead of waiting for the team to count inventory and miss the signing deadline, you can apply for a small business loan to cover the cost of the additional working capital.
Here are a few options:
- Get an inventory financing loan to rapidly stock up on raw materials.
- Take a working capital loan to hire an extra shift worker.
- Open a business line of credit along with a credit card to cover other expenses.
Just as we showed in the example above, tracking COGAS closely lets you act quickly and with confidence, allowing you to lock in a huge new customer.
COGAS for Strategic Pricing Decisions
Accurate COGAS lets you make strategic pricing decisions, including offering a discount to lock in a new customer. To show how this works, let’s go back to the very first example from above:
- Sales forecast for next quarter is $1,000,000.
- COGS should be $250,000.
- Your COGAS is only $150,000.
When you realized COGAS was $100,000 short compared to what you needed to meet demand, your first action was to ask the purchasing manager for an explanation. Now, imagine they gave you this response:
- They negotiated a discount on raw materials. The $150,000 in COGAS represents the same amount of inventory that used to cost $200,000.
- Plus, there’s a shipment on the way with enough inventory to cover the sales forecast and still have a significant amount left over.
This gives you two pieces of helpful information:
- Thanks to your purchasing manager, what used to cost $200,000 now costs $150,000. So, you can forecast 25% lower COGAS needed going forward.
- You have the inventory to cover the sales forecast and still have some products remaining.
In this situation, you need to move excess inventory. COGAS tells you to incentivize your sales team to get more accounts to make purchases, or that you can offer a 5% discount to reduce your overhead when customers are on the fence about buying.
Since COGAS needed just dropped by 25%, this discount could be a wise decision, given that a 5% discount won’t significantly impact profit margins. Your COGAS formula also shows there’s inventory available to meet demand for new customers.
By using the COGAS formula in your business, you can better manage inventory, take immediate action so that you don’t miss a big opportunity, and make strategic decisions that help drive your business.
